SPX Technologies Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2025

Key Takeaways

  • Positive Sentiment: SPX grew Q2 adjusted EPS by 16% to $1.65, revenues rose 10%, and adjusted EBITDA improved ~16% with 120 bps of margin expansion.
  • Positive Sentiment: The company raised its full‐year adjusted EPS guidance to $6.35–$6.65, implying ~16.5% growth at midpoint and ~18% adjusted EBITDA growth.
  • Positive Sentiment: HVAC segment saw 5.7% revenue growth, 190 bps of margin expansion to 25.4%, and backlog up 19.5%.
  • Positive Sentiment: Launched Olympus VMAX, a dry/adiabatic data center cooling solution, targeting order bookings this year for 2026 revenue and expanding its addressable market.
  • Neutral Sentiment: Detection & Measurement revenues increased 21% (organic 5.5%), but segment margins contracted 60 bps due to sales mix shifts and tariff headwinds.
AI Generated. May Contain Errors.
Earnings Conference Call
SPX Technologies Q2 2025
00:00 / 00:00

There are 9 speakers on the call.

Speaker 7

Good day and thank you for standing by. Welcome to the Q2 2025 SPX Technologies earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mark Carano, Chief Financial Officer. Please go ahead.

Speaker 2

Thank you, Operator, and good afternoon, everyone. Thanks for joining us. With me on the call today is Gene Lowe, our President and Chief Executive Officer. A press release containing our second quarter results was issued today after market close. You can find the release and our earnings slide presentation, as well as a link to a live webcast of this call, in the Investor Relations section of our website at spx.com. I encourage you to review our disclosure and discussion of GAAP results in the press release and to follow along with the slide presentation during our prepared remarks. A replay of the webcast will be available on our website. As a reminder, portions of our presentation and comments are forward-looking and subject to safe harbor provisions. Please also note the risk factors in our most recent SEC filings.

Speaker 2

Our comments today will largely focus on adjusted financial results, and comparisons will be to the results of continuing operations only. You can find detailed reconciliations of historical adjusted figures from their respective GAAP measures in the appendix to today's presentation. Our adjusted earnings per share exclude amortization expense, acquisition-related costs, non-service pension items, mark-to-market changes, and other items. Finally, we'll be meeting with investors at various events over the quarter, including the Seaport Virtual Investor Conference in August and the Jefferies Industrial Conference in September. With that, I'll turn the call over to Gene.

Speaker 3

Thanks, Mark. Good afternoon, everyone, and thank you for joining us. On the call today we'll provide you with an update on our consolidated and segment results for the second quarter of 2025, as well as an update.

Speaker 2

On our full year outlook.

Speaker 3

Our Q2 performance was strong. We grew second quarter adjusted EPS by 16%. SPX Technologies continued to execute well, driving significant profit growth in both segments and making meaningful progress on several key initiatives. Once again, we are raising our full year guidance range to reflect our strong results and outlook for the remainder of the year. We now anticipate growth in adjusted EBITDA of 18% at the midpoint of our updated range. Looking ahead, we remain well positioned to continue executing on our organic and inorganic value creation initiatives supported by a robust M&A pipeline. Turning to high level results for the second quarter, we grew revenue by 10%, largely driven by the benefit of recent acquisitions and project sales in our Detection and Measurement segment. Adjusted EBITDA increased by approximately 16% year over year with 120 basis points of margin expansion.

Speaker 3

As always, I'd like to update you on our value creation initiatives. Over the past quarter, we've continued to gain traction on our growth and new product initiatives. We are making meaningful progress on expansion plans for our engineered air movement businesses where we see significant demand in excess of our current production capacity. We expect to announce site locations for the U.S. production expansion of our Tamco actuated dampers and Ingenia custom air handling units before year end, with incremental production capacity anticipated to come online in the first half of 2026. On the new product front, we're receiving positive feedback and engagement from customers on the launch of our Olympus Vmax product, a new cooling solution focused on the large scale needs of data center customers.

Speaker 3

Introduced earlier this year, Olympus Vmax runs either dry using no water or in adiabatic mode, allowing the user to optimize their preferences between water and power usage. We expect this product to strengthen our position and significantly increase our addressable market in data center cooling solutions. Our target is to book Olympus Vmax orders this year for revenue in 2026 and we believe we're on track to achieve this target. Now, I'll turn the call back to Mark.

Speaker 2

To review our financial results.

Speaker 3

Thanks Gene.

Speaker 2

Our second quarter results were strong. Year over year, adjusted EPS grew 16% to $1.65 for the quarter. Total company revenues increased 10% year over year, primarily driven by the acquisition of KTS and Sigma Omega as well as higher project sales in detection and measurement. Consolidated segment income grew by $18 million or 15.5% to $136 million, while segment margin increased 110 basis points for the quarter. In our HVAC segment, revenues grew 5.7% year over year with 4.9% in organic growth. On an organic basis, revenues increased 0.7%, with the modest increase reflecting a large cooling service project in the prior year. Excluding this project, the organic increase was approximately 7%, solid growth from both cooling and heating. Segment income grew by $12 million or 14.5%, while segment margin increased 190 basis points.

Speaker 2

The increases in segment income and margin were largely due to higher volumes with a more accretive mix and favorable project execution in our cooling business that generated higher than typical margins. The latter accounted for nearly half of the segment's year over year margin improvement. Segment backlog at quarter end was $540 million, up 19.5% from Q1, including approximately 7% organically.

Speaker 3

For the quarter.

Speaker 2

In our Detection & Measurement segment, revenues increased 21% year over year. On an organic basis, revenue increased 5.5%. The KTS acquisition accounted for an increase of 14.9%, and FX was a modest tailwind. The increase in organic revenue was largely due to higher transportation and Comtech project deliveries year over year. Segment income grew $6 million, or 18%, primarily driven by the KTS acquisition, while segment margin declined 60 basis points, reflecting a slightly more favorable sales mix in the prior year. Segment backlog at quarter end was $365 million, up 6% sequentially for Q1, all organic. Turning now to our financial position at the end of the quarter, we ended Q2 with cash of $137 million and total debt of approximately $1 billion.

Speaker 2

Our leverage ratio, as calculated under our bank credit agreement, was approximately 1.7 times, including the effect of the Sigma Omega acquisition, which closed in mid-April. We anticipate our leverage ratio declining below the low end of our target range by year end, assuming no further capital deployment. Beyond our guidance, Q2 adjusted free cash flow was approximately $37 million. Moving on to our full year 2025 guidance, we are updating adjusted EPS to a range of $6.35 to $6.65, reflecting a year over year growth of 16.5% at the midpoint. This represents an increase from our previous range of $6.10 to $6.40. The increase reflects our strong Q2 results and second half outlook.

Speaker 2

In HVAC, we are narrowing our revenue guidance range, resulting in a midpoint of approximately $1.52 billion, while our margin guidance is increasing by 75 basis points at the midpoint, largely to reflect our performance in Q2. In Detection & Measurement, we are increasing revenue and margin guidance to reflect additional project deliveries in 2025. With respect to cadence, we expect Q3 adjusted EPS will be approximately flat sequentially, and the second half as a percentage of the full year will be similar to the prior year. As always, you'll find modeling considerations in the appendix to our presentation, and with that I'll turn the call back over to Gene.

Speaker 3

Thanks, Mark. Market conditions support our increased full year outlook for 2025. In our HVAC segment, we have a healthy backlog for our highly engineered solutions and our core markets remain solid. We continue to feel positive about data center opportunities in 2025, 2026, and our related new product introduction initiatives are progressing well. In our Detection and Measurement segment, run-rate market demand remains flattish with regional variation, while our project businesses are seeing healthy front log activity with many new bookings slated for delivery in 2026 and beyond. In summary, I'm pleased with our strong Q2 performance and I'm confident in our updated guidance, which implies adjusted EBITDA growth of approximately 18%. We continue to see solid momentum in our end markets and key initiatives, including our progress on capacity expansions and new product introductions. We also have a robust M&A pipeline with several attractive opportunities.

Speaker 3

Looking ahead, I remain excited about our future. With a proven strategy and a highly capable, experienced team, I see significant opportunities for SPX Technologies to continue growing and driving value for years to come. With that, I'll turn the call back to Mark.

Speaker 2

Thanks, Gene. Operator, we will now go to questions, certainly.

Speaker 7

As a reminder to ask a question, please press Star one one on your telephone and wait for your name to be announced. To withdraw your question, please press Star one one again. Please stand by while we compile our Q&A roster. Our first question today will be coming from Bryan Francis Blair of Oppenheimer & Co. Bryan, your line is open.

Speaker 8

Thank you. Good afternoon, guys.

Speaker 3

Very solid quarter.

Speaker 2

Hey Brian.

Speaker 3

Thanks.

Speaker 8

Brian, you called out data center technology investment and obviously there's a lot of enthusiasm, renewed enthusiasm on data center build out and growth runway. What kind of growth is your team seeing in the space? What are expectations for 2025 and are you willing to size orders to date in dry and adiabatic technologies and how supportive that rollout may or should be to 2026?

Speaker 2

Brett.

Speaker 3

Yeah, why don't I start there? Brian, I think as we've talked about in the past, data center has become more material to us. Using broad brush numbers, this has grown from let's say around $150 million to $200 million in 2025. This would be around high single digits for the company overall, say 9%. This will grow further going into 2026. We feel like we're very well positioned with our product portfolio, in particular on cooling towers, also our actuated dampers. As we've talked about in the past, we have significantly increased our TAM, our addressable market, with the introduction of the Olympus Vmax. This is a dry and or adiabatic solution that is large in scale for the data center market and I would say we feel very good about where we are. What we've said is we want to get a material amount of bookings.

Speaker 3

We're talking the tens of millions of dollars for this year that we would anticipate revenueing in next year. I think we are right on track and feeling very good about this product. We actually feel like we have a number of advantages on this product and it's being seen and received in the market. If you step back and look at where we play in data center, I think this year is a good year for us and I think next year is going to be even better. Overall we like what we're seeing. What does this mean at the company level? We're not going to offer guidance at this point, but it will be higher than 9% of our company revenue. We'd probably say low double digits as we look ahead to 2026.

Speaker 8

That's very exciting. You noted U.S. manufacturing capacity for Tamco and Ingenia being online during the first half of next year.

Speaker 3

If we were to take the capacity.

Speaker 8

Add in the U.S. for those businesses, combined with what's ongoing in Quebec for Ingenia, what would the run-rate revenue capacity lift be if we were to fast forward to the middle of next year or the end of next year?

Speaker 3

Yeah, what we've said, if you look at Canada, Mirabel, where I know a number of people have just visited, just a fabulous facility, team, and product area, we basically said we wanted to get to $100 million run rate by the end of last year. We came very close to that. I'd say we're a little short, but very close to that. We really want to be at $140 million run rate out of that facility by the end of Q4. That doesn't mean we'd get to that revenue number this year, but we'd be running at that rate. The capacity expansions there are going well. I think that we are growing and I think that we're, from what we see, it's not easy to grow and add capacity of a highly robotic, automated solution, but we are making very nice progress.

Speaker 3

I think we're going to hit that for this year. What we've said is that when we add the new facility, we would target, by the end of 2027, to be in the range of having a capacity of $300 million-ish run rate. If you look at that, that's a very significant growth to where we were last year and very significant growth to where we are. This again, we've talked about Ingenia a lot. They have truly a great product, not only a great physical product, but the software solution, their system, one solution which we think no one in the industry can match in terms of how quickly they can configure a unique solution for customers. We feel good about that.

Speaker 3

We would expect to see some nice meaningful growth from Ingenia, really driven as a part of our expansion in Mirabel, outside of Montreal, but then also our U.S. expansion which we think will get up and up and rolling in the first half 2026.

Speaker 8

Appreciate that detail, and if we move to the D&M side of the portfolio, there's better project momentum than we expected at this point. You've spoken to the 2026 prospects, and it sounds like that visibility is getting better and better. For the back half of this year for D&M, what's your team contemplating in terms of project contribution versus run-rate activity?

Speaker 2

Yeah, Brian, I think as we said, we remain excited about what we're seeing on the project front in D&M for the back half of the year and into 2026. I think as you probably can tell, book to bill was around 1.1 for the quarter. Backlog has grown nicely. We expect it to be even higher by the end of the year. I would guess, as I look at the project business, we're expecting that to kind of grow in the high teens organically during the second half of the year. That's great to hear, thanks again.

Speaker 7

Our next question will be coming from Damian Mark Karas of UBS Investment Bank. Damian, your line is open.

Speaker 1

Hey, good evening, gentlemen.

Speaker 2

Hey Damian.

Speaker 3

Hey Mark.

Speaker 1

Just a follow up clarification on that comment you just made. You did raise the sales guidance for D&M, you know, by like mid single digits, and you've got this double digit growth baked into the back half. I'm just trying to understand.

Speaker 3

Is some of the stuff that.

Speaker 1

You thought was going to happen in 2026 actually kind of happening sooner, getting pulled forward, or did you actually see new project activity kind of pop up in the last couple months that really wasn't there when we last talked?

Speaker 3

No, Damian, that was.

Speaker 2

The raise or the increase in the guide was really projects that were in the very early part of 2026 that have moved into 2025. It's really just sort of a timing dynamic. We say this all the time but we do our best to get these in the year. Within shorter periods of time, they can move across quarters fairly easily. That's really what drove it. We continue to see a lot of activity on the project side. I just mentioned that, reiterate it, despite those moving from 2026 to 2025. We're continuing to see a lot of activity both on the Genfare side of the business as well as Comtech.

Speaker 1

Understood, thanks for clarifying on that. I wanted to ask you about the HVAC margin. Obviously quite strong there in the second quarter. Could you just talk a little bit about what drove the strength? The guide looks like it suggests you'll see a little bit of a step down. I know you raised the full year segment margin, but you're expecting the back half to not be at the same.

Speaker 3

Level the second quarter.

Speaker 1

Could you just talk through your expectations there?

Speaker 2

Yeah, sure. In the quarter the margins were 25.4%. That was year over year. It's about 190 basis points over where we were in Q2 of last year. Really, a couple things that I would call out, one of which was obviously in our prepared remarks, about 50% of this related to some favorable project execution we had within the HVAC business. That represented about half of that increase. The remaining 50% was split between higher volume that we had in the quarter and then we had a more accretive mix, for lack of a better description, a higher margin kind of book of business within the quarter. That's really how it broke out between the two. When you step back and think about the full year for HVAC, when I look at where our guide was at, 23, I think the midpoint was 23.75% margin.

Speaker 2

We've moved that up to a midpoint of 24.5%. It's up 80 basis points for the full year.

Speaker 3

When you look at the half.

Speaker 2

Year, it will actually also be up in the range of about 40 basis points.

Speaker 8

Okay.

Speaker 1

All right, thanks for that explanation. I will get back in the queue.

Speaker 7

Thank you. Our next question will be coming from Ross Riley Sparenblek of William Blair & Company. Your line is open.

Speaker 3

Hey, good afternoon, gentlemen. Hey everyone. Just a clarifying point on the Olympus Vmax.

Speaker 1

You said dry and adiabatic.

Speaker 3

This is dual unit or we should still expect a dry launch later this year. They're both launched, Ross. The beauty of this product is it's modular, which we actually think gives us a competitive advantage. What that means is you can buy this as a dry product without the adiabatic. The adiabatic is the part of the system that delivers the water on the outside that gives you higher efficiencies and reduces your energy. They are both in the market. We are quoting both. We are making nice progress on both. Yeah, they're both out there today. Okay. Can you maybe just help us get a better sense of what the mix profile will be for these two products? It depends. I think that we've had some customers that we are working with flip back and forth.

Speaker 3

In general, I think you get a lot more value out of adiabatic because, you know, water, it just gives you higher efficiencies, less power usage, less carbon emissions. If I were to look at it, just to set the table as a reminder for data centers, this segment of the market is bigger than cooling towers. You think of everything we've done with the Everest, which has been a great product for us and growing very rapidly. This new market we've entered is larger than that market. I would say we've seen interest in both, but probably, rough ballpark, maybe 2/3 adiabatic, 1/3 dry is what I would say.

Speaker 2

Okay.

Speaker 3

Based on what you can say, any thoughts on kind of competitive positioning in the market and maybe potential exclusivity with the hyperscalers? I think our competitive positioning is very strong. I think we have a number of advantages here that are being seen by the end customers. You start with our heritage of cooling towers, where we are, I would argue, the number one cooling tower provider in the world. We invented the cooling tower. You look at natural draft towers, large towers. We just have some unique competencies on airflow, heat exchange, back pressure analysis, et cetera. We're very good at the big stuff. What has happened is we believe we have a very strong position in cooling towers for data centers. A lot of the technology, a lot of the capability translates over.

Speaker 3

If you think about it, a couple of things that I would call out that I think we believe we have some unique advantages there. First, we have a modular design, which means the same product can be upgraded and get more tonnage. Our competitors, we don't see that being prevalent in the market. We think that gives us an advantage. I would say our mechanical equipment, we make our own unique fan designs, our own motor designs, our own gear reducer designs that have been battle tested over the past 50 years. In the field for cooling towers, this is really a cooling tower with a different heat exchange. It's really a coil product. That translates very nicely that we believe we have an advantage on our mechanical equipment. This is particularly important for data centers who really care about uptime.

Speaker 3

We have, I believe, the best uptime equipment in the market. The third thing I would say is, we're doing CTI testing. We believe we're going to be one of two products that will be CTI validated. That means Cooling Tower Institute validated, which basically shows that it guarantees the performance of your product. When customers buy our products, they're darn sure they're going to get the performance that they want and they need. We feel good about this market and I would expect we're going to be shipping product here in 2026. Very helpful.

Speaker 4

Thanks Jean.

Speaker 2

I'll jump back in queue.

Speaker 7

We have one moment for our next question. Our next question will be coming from Jeffrey Wallin Van Sinderen of B. Riley Securities. Your line is open. Jeff.

Speaker 2

Hey, Jeff.

Speaker 3

Hi.

Operator

Everyone wanted to check a little bit more if we could on, I guess get a better understanding if we could on the applications for the Olympus Vmax and data centers. I guess if customers are deciding between going with the Olympus Vmax and going with another solution, what are the main considerations that would make them decide to go with the Olympus Vmax? Is it how much of that might be speed, cost, performance, etc.

Speaker 3

Yeah, I mean, I think if I look at it, you know what I would say in this market. I think if you go to, if you look at the cooling tower market in the U.S., the water cooled cooling tower market, it's a very consolidated market. There's three large players that account for the majority of the market. For example, in North America, in the air cooled, you see more fragmentation, there's more players, there's a number of players. Having said that, when you get to the very large applications, it's a much smaller set of competitors. The reason being is there's very high engineering requirements. You know, if you look at these products, these products are humongous, 40 ft long. You know, it could be up to 20 ft high.

Speaker 3

You know, you're talking tons of product that you need to be very capable of handling in like large industrial scale and understanding all of the associated ramifications of that. That really narrows down the number of people who can be a qualified provider in that market. I would say we shine in that regard. The second thing I would say is they typically look at all of the things that customers look at. They want certain efficiency levels, what's the power usage. They want to be able to do something that is flexible, it can run with the water on, with the water off. They have sound requirements. Low sound is important. Some of these data centers are going in neighborhoods. They don't want to have, you know, a lot of decibels out there. When you look at these markets, there's usually a number of different features and benefits.

Speaker 3

Typically they're going to want to partner with a large scale partner who, you know, they can count on to meet their very large needs. They want to have engineering capabilities to be able to solve any issues that may arise during the engineering or the delivery process. They want the functional specifications that they're desiring. Of course, if you've got better efficiencies, if you've got better airflow, you've got lower horsepower motors, you'll do better. I think we match up very well on our product. I think we match up very well on being a very qualified supplier in that market. I think the Marley brand holds a lot of weight in the cooling tower market, and I think that's a real benefit for us. Those would be some of the things to think about.

Speaker 3

One thing I would say in this market, most data center, talking about the hyperscalers, they prefer to have, they don't. They prefer not to sole source. They prefer to have a large provider. Then, you know, they prefer to have an option of a smaller supplier. They'll typically try to avoid being sole source to one company here.

Operator

Makes sense. If we shift to the D&M business for a moment, maybe you can delve a little bit more into kind of the main drivers you're seeing for that business and the growth you're expecting going forward, and maybe touch on the drone detection and jamming part of that business. Just curious, kind of, I guess, where you're seeing demand there. Are you seeing anything in civilian? Is it more defense?

Speaker 3

What kind of?

Operator

How's that shaping up?

Speaker 3

Yeah, sure, I'll start and then Mark can jump in here. I think that, you know, if you look at, this is a level set. If you look at the detection and measurement business, approximately two thirds of that business is run rate. Run rate's been flattish. Modest growth we've seen over the past two years. Actually, some nicer growth this year, but projects are about a third of that business and we've seen really nice progress here. What I would say is the way I think about it is transportation, really our Genfare business, that would be installing large projects for our customers there. You know what drives that? The transportation build has been out there for a couple of years, has provided support, but the punchline is we've seen good activity there. We've had some really nice competitive wins, had some multi-year wins.

Speaker 3

If I look at that business, it's the normal course. We have expanded our addressable opportunity. We've actually launched a new ticket vending solution, the hardware and software that really opens up some opportunities for us. We've already won our first two large customers there, one large, one middle size, with a number of other bids ongoing. That's probably what's driving the transportation. On the Comtech, there is a good chunk of Comtech which is military, but there's also non-military components in there. A lot of our PCI branded product is used for spectrum monitoring. That same product is also used in military applications. To your point, we are seeing drones being a primary application usage there. Our products can really help you identify where the enemies are, but also where all the drones are and it works very well. That's been the driver of our projects there.

Speaker 3

The newest acquisition, which is also a part of that, is called KTS. That's a little bit different of a space, but we think there are some nice benefits from drones there, where they provide digital interoperability, where they are the centralized point of communication for customers. They bring all these different disparate communication technologies into one solution. We're seeing a lot of drone activity there and our products being used in those applications there. That is a driver for us. Okay, great.

Operator

If I could just squeeze one more in on the M&A front, just wondering, any shifts in focus there where you might be most focused, and then how are targets aligning for completion?

Speaker 3

Yeah, what I would say on M&A is I'm feeling very, very positive. As a reminder, M&A is a critical component of our value creation strategy. If you've been following our company, we really invest for growth. 98% of our cash flow has gone into growth, predominantly M&A and CapEx. 92% in terms of acquisitions. $2 billion in capital, 16 acquisitions. Average price has been 10 to 12 times. These are really good businesses, really hard synergies that have really strengthened our company and have been accretive on aggregate, both in margins and in growth rate. As I step back and look at where we are today, I'd say our pipeline is very robust. It's robust not only now for what we see and what we're actively working on, but also for what we see coming out over the next 12 months.

Speaker 3

The areas within our business that we see the most activity, probably the largest one, would be engineered air movement. We really like this. This is really a great business for us. You talk about Ingenia, you talk about Tamco, you talk about Strobic and Cincinnati Fan. We see a lot of runway here and we see some very attractive opportunities to continue to build and strengthen that business. I would say we're seeing some nice opportunities in the detection and measurement side, probably most specifically Comtech and Transportation. We think there's some very nice synergistic opportunities there as well.

Operator

Okay, thanks for taking my questions.

Speaker 3

Thank you.

Speaker 7

Our next question comes from Stephen Michael Ferazani of Sidoti & Company.

Speaker 1

Your line is open.

Speaker 7

Steve.

Speaker 4

Good evening, Gene.

Speaker 3

Mark, how are you doing?

Speaker 4

I'm well, I'm well. Sounds like you're doing pretty well as well. I wanted to ask about, you know, as we've gone through earnings season, we're hearing certainly from plenty of companies that there were at least some hiccups post Liberation Day. Whether it was expected orders being delayed, whether it was issues with distributors exercising more caution. It sounds like you were completely exempt from all of it. Maybe that's because of the precision engineered products. Can you touch on that at all? Did you see any sense of caution in the market, at least in those first couple of months as there was just general economic uncertainty?

Speaker 3

I'll start and I'll throw it over to Mark. I'd say, you know, you look at our overall, I think it's been managed pretty well. We can't really point to anything. One thing I would say you got to be a little careful of is companies don't typically start large capital programs and there's lots of uncertainty. We're going to keep our eye on the Dodge report, for example, and, you know, if you were to build a new hospital or a new manufacturing facility, the demand that would hit us, the cooling towers or the custom air handling or any of our range of products, is typically downstream. We want to keep our eyes on that.

Speaker 3

I would say that overall if I look at our end market demands going into 2026, actually Exodus had our full strategic review last week and I would say our end markets look on track for 2026. We're actually feeling good, Mark, what you said. We did get clipped a little bit with tariffs. Yeah, a little bit.

Speaker 2

We can come back to that. From a supply chain perspective, we're largely in country for country with a lot of our manufacturing, and I wouldn't say we really had any issues with respect to sourcing equipment or anything of that nature. We've done a lot to manage that through the COVID period and deploying our business system and our supply chain capabilities to make sure we were well positioned to support the business competitively over the last quarter or so.

Speaker 3

Okay, that's helpful.

Speaker 4

You said there was some you wanted to touch on, follow up on the tariff issue.

Speaker 2

Yeah, you know, I mean, big picture, Steve. I think, you know, last quarter we talked about tariffs being, you know, at a midpoint, kind of a $0.10 headwind for the year, you know, which is frankly, you know, not really that material a number when you think about total EPS and, you know, over the last kind of quarter, I mean, the change, the tariff environment has been changing. Right. Almost weekly or daily it feels like it's hit at least a new floor for now. Nevertheless, kind of managing through that and looking at our, I come back to our business system and our supply chain teams really focusing on that. We've actually sort of recalibrated our exposure and we actually think it's only about $0.05, you know, for the total company.

Speaker 4

Wow, that's great. I want to turn for a second to free cash flow. You are trailing where you were last year through the first half. Looks like there was a more sizable working capital build. I know you had the two acquisitions. I'm sure there was some cash costs involved in that. You guided for being back towards the lower end of your net leverage target ratio. It would seem to indicate much stronger free cash flow than the typical seasonal working capital reversal. Can you touch on free cash flow trends you're expecting in second half?

Speaker 2

Yeah, sure. Listen, I'm still confident about us meeting kind of our free cash flow commitments for the year. No change there this quarter. You're absolutely right, it kind of stuck out. From a working capital perspective, there's really timing around AR and some of the big project work that we've had in the first half of.

Speaker 3

The year, particularly Q2.

Speaker 2

If you looked at inventory, you're probably looking at the cash flow statement. Much like other companies, we, in order to mitigate, despite it being the tariff impact not being a material issue for us, we certainly were looking at ways to mitigate it and buying ahead and putting inventory on the balance sheet. We're well positioned to meet our commitments.

Speaker 3

Excellent.

Speaker 4

If I get one more. Ian, in terms of M&A strategy moving forward, you've gotten a lot larger through 16 acquisitions.

Speaker 3

Does this.

Speaker 4

I've been asked this question. I'm sure you're getting asked this question. Does this mean your targets have to get larger so that they can move the needle? Does this change your M&A strategy at all, given your size now, Steve?

Speaker 3

I don't think so. I mean, if you think about it, our average deal size has been $130 million over the past, you know, 16 deals. What I would say is as we've grown, our surface area has gotten larger. For example, engineered air movement is not a business we were in five years ago. Right now, it is a very important part of our business, and there is a different range of opportunities there. I would expect our core bread and butter. If you look at our strategy now, we think we're in the early innings of our strategy and we don't see change. I think you're right. We have done some deals that were at a higher value, $300 million, $400 million, and we're very comfortable doing that as long as it is a very good strategic fit.

Speaker 3

If I look at the range of what we have in our pipeline, the opportunity sets looking forward, our strategy is the same.

Speaker 4

Okay, great.

Speaker 3

Thanks, Gene.

Speaker 4

Thanks, Mark.

Speaker 2

Thank you.

Speaker 7

Our next question will be coming from Walter Scott Liptak of Seaport Research Partners.

Speaker 3

Your line is open, Walter.

Speaker 2

Hey, Walt.

Speaker 6

Hi.

Speaker 3

Thanks.

Speaker 2

Good evening, everyone.

Speaker 6

I wanted to ask sort of a follow on. On the price cost, you know, gross margins and HVAC. You kind of went over those already. As we're looking into the back half and looking at that, the backlogs, you know, how is that shaping up for the back half? You talked about some headwinds, you know, are we at a high point in the year for gross margins? And they come down, you know, how.

Speaker 2

Should we think about that? No, I don't think so, Walt. You know, when I think about price, volume, and you think about that balance there, which I know is not directly your question. Prices on the HVAC side, when I look at the growth, it's probably maybe about a third of it, probably approaching about a third of it with the two thirds being volume. It is less price on the D&M side, more volume.

Speaker 3

Okay, great.

Speaker 2

That's. Go ahead.

Speaker 3

Okay.

Speaker 6

Yeah, I was just going to switch over to D&M margins too. That backlog is up nicely as well. You know, considering the tariffs again and the mix of business, how do margins look for the second half of the year?

Speaker 2

Yeah, I think the implied second half there, if you look at the guide, it would imply that they're down for the second half of the year. That's really driven by the tariff dynamic we just talked about, the $0.05 tariff exposure. As we recalibrated that and looked at the impact, it's really going to be back half weighted. It'll be in Q3 and Q4 and predominantly in the D&M business. They're seeing the impact of that more so than in the HVAC business. We are making, you know, low single digit dollars, but we are making some investments around some of these new products, particularly our ticket vending machine and some of these other Comtech products. We're investing in those as we kind of position the company for 2026 and beyond. It's really those two elements that are impacting it.

Speaker 3

Okay, all right, great.

Speaker 6

Maybe just a.

Speaker 3

Last one on M&A for me.

Speaker 2

I wonder if you could refresh us.

Speaker 6

On just your capacity.

Speaker 3

And.

Speaker 6

I think you kind of talked about this already.

Speaker 2

If you're going to stick to the.

Speaker 6

Same deal size as before. How much dry powder do you have for M&A?

Speaker 2

Yeah, obviously our current borrowings are $500 million on our revolving credit facility. We'll continue to pay that down through the balance of the year. We've got a $1 billion credit facility as we sit today, so we've got plenty of firepower when you think about the size of transactions that we normally do from an average size perspective. I feel good about where we sit today. We obviously have the ability to access capital if we needed it, but right now we're in a good spot.

Speaker 3

Okay, great. All right, thank you. One moment for our next question.

Speaker 7

Our next question will be coming from Bradley Thomas Hewitt of Wolfe Research.

Speaker 3

Brad, your line is open. Hey, good evening, guys. Hey, Brad.

Speaker 5

As it relates to the moving pieces on the Q3 guidance, how should we think about organic growth and margins both by segment and at the consolidated level?

Speaker 2

Yeah, Brad, maybe I'll kind of think about it from a, I'll start with the second half kind of perspective because I think that's, that's kind of helpful. You know, when I look at, when I look at the implied second half for HVAC, we're looking at, that implies growth of about mid teens and about two thirds of that would be organic. You know, with margins being up 40 basis points year over year from 24.7% to 24.7%, from 24.3%. You know, on the D&M front, you know, much higher growth on that side just given the inorganic and new organic contributions there.

Speaker 2

Organic is similar, I would say in total to about what HVAC is, so circa around 10%, you know, with margins, you know, stepping down a bit from 2024, about 90 basis points based on largely the things that we mentioned earlier, tariffs as well as the impact of some of the investments that we have during the back half of the year.

Speaker 3

Okay, that's helpful.

Speaker 5

Switching gears a little bit here, a lot of the data points seem to suggest that the outlook for data center is stronger than it was a couple months ago. I guess curious what you would need to see in order to accelerate your investments in data center even further, whether it be organically or inorganically.

Speaker 2

Thank you.

Speaker 3

What I would say, Brad, is I would say that, yeah, we are.

Speaker 7

Sitting.

Speaker 3

Here three months after our last earnings call and we are feeling even more bullish about the opportunity set. I would say in all kind of. If I look at our three main product categories, cooling towers, the actuated dampers, air movement, and then our new product, we feel very good. We are spending a lot of work on being able to support that growth. No, we're not throttling back at all. We are supporting the growth because we think this is a good market. We think we have a great right to play, a great right to win here and we do see a lot of runway ahead. Great, thanks Gene.

Speaker 7

Our next question will be coming from Damian Mark Karas of UBS Investment Bank. Damian, your line is open.

Speaker 1

Hey guys, just had a few follow up questions. Mark, you were talking about the tariffs exposure. Just curious, did you end up taking pricing actions in the second quarter?

Speaker 3

If so, to what extent we did?

Speaker 2

We took pricing actions across both businesses where we could. It's driven by the competitive dynamics in both of those segments. Yes, that was both a combination of price increases and surcharges depending on the business unit and where they felt they could achieve that increase.

Speaker 3

Okay, got it.

Speaker 1

You'll see a little bit of.

Speaker 3

A step down on some of the surcharges and the rest of the year.

Speaker 2

I think, particularly as it related to certain areas like China, where shortly, I guess it was in May, I've kind of lost track of all the changes, quite frankly. The China tariffs stepped down pretty dramatically. In some cases where we were using surcharges as a way to offset that cost, those are harder to stick, clearly.

Speaker 3

That makes sense.

Speaker 1

I wanted to ask you about your early experience so far with the two new acquisitions. It's been, I guess, about half a year with Cranzi and, you know, maybe a quarter or so with Sigma Omega. Gene, like, you know, how's the integration been going with SPX Technologies? Any unexpected surprises, whether good or bad?

Speaker 3

Yeah, I would say very, very positive. So KTS, we call them. Our deal thesis there was twofold. One, their intrinsic product and position. We see a lot of growth just in their current market and current positioning, but the real areas of synergy where we can kind of create some nice additional values on two sides. One is we actually think their technology could help our TCI and ECS products. We've already integrated some of this. We're actually launching this combined product, I believe in September. We've actually strengthened our technology position on our core compact business. The second main element of the thesis is KTS is very successful in the U.S. but they're very small globally, whereas our Comtech business is a very global business. It has installed bases all over the world, probably more than 100 countries, and we can help them accelerate.

Speaker 3

We already have active discussions and I don't know what's public or not, so I'll just say there's already two countries that I'm aware of where we're having very active discussions of leveraging their digital interoperability platform in those countries. Friendly countries obviously, but yeah. KTS, both of these businesses were just here for our STRAT plan, first time of them being with all of the teams, part of the greater whole. I would say it went very well. Really like the leadership of KTS, very driven, very hard working. KTS is very good. Sigma Omega also, we feel very good about. That is very much, really a part of our hydronics business now. Think of that going with Lyle McLean and Patterson Kelly. All three of those have a great degree of overlap. The thesis there is that Sigma Omega has a great heat pump technology.

Speaker 3

Very, very strong position in the multi level. You know, you're looking at hospitals or residential or hotels, things like that. Very good position but in a smaller number of markets. Very strong in Canada but less channel in the U.S. We're helping them build their channel. As you know, Damian, we have a very strong channel in the U.S. You look at our Marley channel, you look at some of our other brands. We've already signed up a number of new channel partners for Sigma Omega and we actually see some good opportunities to continue that. We think we're going to help them accelerate their revenue. Where we sit today, we feel very good about those. Sigma Omega has a great team too. I really, really like their team. They're very, they're truly our industry experts.

Speaker 3

They spent many, many decades at some of the big OEMs, the Tranes, the Yorks, and they bring to bear just a ton of expertise. We feel good about that. If you go to the acquisition prior to that, Ingenia, just the growth we've seen there and the success we've seen there has been very attractive. I think, you know, we feel good about our M&A strategy. We're very disciplined and I think that, as you know, there's a lot of data that says, you know, if you have a lot of experience and it's a part of your ongoing business system, you're going to be more successful. I believe we have a very strong front end, due diligence process, strategy, process, then you obviously have to deliver the goods. The integration is very, very important and we have a very good team here that helps make that happen.

Speaker 3

To cut to the chase, we feel very good about both of those. Damian, great to hear.

Speaker 1

One last question here, if I could squeeze it in. Obviously I'm nitpicking a bit because the HVAC business has been growing by leaps and bounds, but you actually lowered the high end of the range. This is the first time we've seen the HVAC sales guidance come down, not go up since the fourth quarter of 2021. I just want to get your thoughts. Data centers obviously are doing quite well. Are there by chance any end markets within HVAC that are maybe dragging a bit?

Speaker 2

Hey, Damian, I'll start with that. I actually wanted to kind of come back to your margin question from earlier. We just tweaked the top end of the range on HVAC in part because of surcharges. That was really what was driving it. Where we had been using surcharges or we had forecast that we would use surcharges to offset some of the tariff dynamic. Obviously it wasn't nearly as material as we thought it would be. Many of those are no longer in effect. That's really what was driving it. Nothing more than that.

Speaker 3

Okay, thanks for clarifying. Yeah.

Speaker 2

Back to your margin question. I know you were looking at second half. I wanted to kind of give you another way to think about it. When you look at the first half margins in HVAC and you kind of back out that favorable project experience we had in Q2, that first half margin is about 23%, right around there, just under 24%. The implied second half is 24.7%. You can see kind of the lift in margins in the business in the back half of the year.

Speaker 3

a year over year basis. Yep, yep, understood.

Speaker 1

All right, thanks a lot for sequential.

Speaker 2

That's sequential. Sorry.

Speaker 3

Thanks, David. Thanks. Okay.

Speaker 7

I would now like to turn the conference back to Mark for closing remarks.

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